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APAC brief 19 Mar

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MaxIG

Markets trade thin ahead of central bank risks: It’s said that money makes the world go around. And given central bankers control the money of the world, it is they who decide when the turning starts and stops. Described this way, central bankers role in the economy sounds Bond-villain-esque. That’s entirely unfair of course – only fringe-dwellers would suggest they are so malevolent. But recent history, based on experiential evidence, suggests that when it comes to financial markets, the actions of central bankers take primacy over all other considerations. This phenomenon must be a transient thing – a part of some other historical process. All high priests eventually lose their power. For now, though, it feels the age of the central-banker has reached its epoch, with markets dutifully obeying their rule.

Markets pace the margins: The reason for the foregoing expatiation is that financial markets, owing to a dearth of economic and corporate data, have traded quietly in anticipation of several key central bank meetings this week. Naturally, the biggest of them all is Thursday morning’s US Federal Reserve meeting. In preparation for the event, traders are pacing the markets’ fringes. Risk appetite on Wall Street is still rather well supported. Volumes are below average but having broken key-resistance at 2815 on Friday, the clearing of that technical level has invited in some buyers. Rates markets are largely unchanged, although US bond yields have ticked slightly higher across the board, while the US Dollar is relatively steady, albeit well off its recent highs.

RBA-Minutes released today: An expounding of the internal dynamics of US financial markets ahead of this week’s US Fed meeting is for another day. For the moment, it’s simply handy to know that it’s market participants’ major mental block. Localizing the focus, Australian traders and market-watchers are preparing for their own dose of central bank news. This afternoon welcomes the release of the RBA’s Monetary Policy Minutes for its March meeting. Few surprises are expected out of today’s release, it must be stated (what’s new when it comes to the RBA?) The market impact, consequently, may prove negligible, aside from a move of a few pips here and there on the Aussie-Dollar crosses, and maybe a shift in the yield of ACGBs.

Themes to watch from the RBA: Nevertheless, for econo-watchers, some familiar themes will be searched-for as today’s minutes are perused. Probably given we are coming up to an election, several economic pressure points have become of greater relevance. House prices are the perennial favourite, especially as it relates to their fall and the so-called “wealth effect” on consumer behaviour. The other to watch-out for pertains to the latest political hot-topic: wages growth. Namely: when (and perhaps, more appropriately, if) adequate growth in wages will materialize. The final key theme to which analysts will be centring their attention on is the labour market outlook, considering a further tightening in it has become the RBA’s proposed panacea to the two other issues, and all their insidious knock-on effects.

Negligible reaction to RBA Minutes is expected: Whatever the RBA's chosen tact in their minutes, it's probable that few answers will be handed from up high today. In an act of what might be considered economic blasphemy, markets participants have grown increasingly cynical of the RBA's outright, "neutral” stance on the Australian economy. Markets are still pricing in approximately 34 basis points of cuts from the RBA this year – with the first cut fully implied by August. Despite this, and although yields on Australian Dollar denominated assets are trending firmly lower, the local currency, courtesy of a lift in the price of key commodity exports, is trading resiliently, clinging onto the 0.7100 handle at present.

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Can commodity rallying prices save the day again? Ever the lucky country, policy makers and politicians alike will be praying this dynamic in the commodity complex lasts. Indirectly, the lift in Australia's terms of trade may be what drives the economy through its current "crosswinds” and keeps the RBA from having to cut interest rates in an already unstable and debt-laden environment. The simple logic is this: the greater tax revenues drawn from a lift in commodity prices will help build a war-chest for the Pollies to play-with, in a bid to win over the electorate with greater tax cuts and spending programs. Undoubtedly, this state of affairs comes with the risk of profligacy. Nonetheless, sensible, stimulatory policy could yet save the economy from the next recession.

ASX searching for a lead to move higher: In the narrow context of today's trade, the ASX200 ought not be affected by this broader hope of future fiscal stimulus for the Australian economy. Wall Street has rallied into its close: the S&P500 has climbed 0.37 per cent for the session. SPI Futures have lifted by virtue of this, indicating a 20-point jump for the ASX200 this morning. That’s proven an unreliable indicator of late, however. For the last week has a rally in SPI futures contract translated into meaningful gains in the cash market. As alluded to Australian-macro currently is all about commodity prices. Materials stocks led the charge yesterday, and the same may go today, with iron ore prices in particular making a fresh run higher.

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Written by Kyle Rodda - IG Australia

 

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